Why are these three elements so important? How does it add pressure to India’s growth story? We decode: (AI image)
Fuel, fertilisers, and foreign exchange – the three items India is focusing on. But why? The US-Iran war has put the global economy at risk, and India is not immune. In fact, it is vulnerable in the current context due to its external dependence on crude oil and fertilisers.
A large portion of the population depends on agriculture, for which fertilizers are an important input. Fuel – whether crude oil, LPG or LNG – supports economic growth and daily life.Finance Minister Nirmala Sitharaman recently urged the country to focus on fuel, fertilizers and foreign exchange, stressing that Prime Minister Narendra Modi’s call to conserve foreign exchange was… “Very important” Amid conflict in the Middle East.“The Prime Minister’s call to preserve foreign exchange as much as possible is extremely important.” Sitharaman said.
She said the pressure on the three Ps – fuel, fertilizers and foreign exchange – must be seen in this context.So why are these three elements so important? How does it add pressure to India’s growth story? We decrypt:
fuel
Your car, your kitchen, taxis, transport and industrial trucks – everything runs on fuel – be it petrol, diesel or LPG. India imports most of its fuel needs – in fact, in the case of crude oil, the dependence is more than 85%! Much of this fuel comes from Middle Eastern countries.
One of the first repercussions of the US-Iran conflict was the significant rise in global crude oil prices and major restrictions on oil and gas supplies due to the closure of the Strait of Hormuz.
The government has assured that there are sufficient supplies of crude oil and liquefied petroleum gas, however The problem is not just about availability. It is the highest cost of availability.You are already feeling the impact – prices of petrol, diesel and CNG have gone up.
LPG – domestic and commercial – is becoming more expensive. Pressure is also mounting on the cooking gas subsidy front. The Union Budget has allocated Rs 12,085 crore for LPG subsidy this year, but this allocation may be insufficient.The government had already compensated oil marketing companies about Rs 26,000 crore for the previous year, while it is estimated that state-owned fuel retailers are currently losing about Rs 700 on every domestic LPG cylinder sold.
The share of subsidized LPG cylinders has been reduced.In addition, previous cuts in excise duty on petrol and diesel have reduced government revenue by more than Rs 1 lakh crore annually.
Economically, higher crude oil prices mean a higher import bill. Any passing on to consumers leads to inflation, which in turn affects growth.DK Srivastava, senior policy advisor at EY India, sees no early end to the issue.
“Even when the crisis is resolved, it may take at least two to three quarters for supply and prices to normalize. Hence, the entire crisis is likely to be affected during 2026-27. India’s dependence on imported crude oil is close to 90%, so crude oil supply and price disruptions are a major vulnerability for the Indian economy.”
Since available crude oil will be imported at higher prices, there is pressure on foreign exchange reserves.
Fertilizers
Just as fuel is necessary to keep cars and kitchens running, fertilizers are the fuel that fuels the agricultural sector. India imports a major portion of its fertilizer requirements and relies heavily on fertilizers such as DAP, potash and NPK. According to a TOI report, 40 million tons of urea are consumed annually, and about 8-10 million tons are imported. Imports also account for about 60% of domestic DAP demand, while potash requirements are met entirely through overseas purchases. So what’s the problem? The Middle East accounts for about 50% of India’s DAP and urea imports. Saudi Arabia is the largest supplier of DAP and Oman is the largest supplier of urea. LNG, an important ingredient for fertilisers, is also imported from the Middle East.The supply constraints across the Strait of Hormuz come just before the monsoon season, and with El Niño forecast to impact rainfall patterns, it’s a double whammy.
The symptom is just one aspect of the problem. The cost of urea and other fertilizers has risen dramatically since the beginning of the conflict. This implies an inflation of the fertilizer subsidy bill, which will put pressure on the government’s financial resources and the targeted fiscal deficit.According to the above TOI report, the government’s fertilizer subsidy bill could reach Rs 3.8 lakh crore – that’s more than double what was allocated in the budget!Urea prices have risen by more than 120% since the outbreak of war.
Prices of key inputs also rose sharply, with DAP increasing by 38%, sulfur by 87%, and ammonia by 84%. The falling rupee has added to the burden, increasing costs by another 6%.
“Considering nitrogen, phosphate and potash fertilizers together, India’s import dependence is about 31%, which is the average over the period 2021-2022 to 2024-2025,” explains DK Srivastava of EY India. “In 2026-27, this vulnerability issue is particularly important because agricultural production is likely to come under pressure from monsoons that are likely to be much lower than normal due to the expectation of a severe El Niño,” he told TOI.
Forex
Foreign exchange reserves form the backbone of a country’s external sector. Anything a country imports requires an outflow of foreign exchange – meaning that if the cost of imported items rises, foreign exchange flows out, thus reducing reserves.Experts have praised the resilience of India’s external sector, with import coverage of about 11 months. But the falling rupee and rising import bills are putting pressure, as the government was quick to point out.
As Dr Srivastava points out: The pressure on foreign exchange reserves also arises from other factors, especially the inflow of funds from India. Net portfolio investment was negative at $16.7 billion in 2025-26. Even net foreign direct investment was negative during the months from August 2025 to January 2026 although there was some recovery in February and March 2026.Prime Minister Narendra Modi recently appealed to citizens to avoid buying gold.
Why? Because India imports a huge amount of gold – and the government does not consider it an essential commodity on which foreign exchange reserves should be spent.It’s simple: the country has enough foreign exchange reserves, but it should choose to use them wisely to buy critical products like fuel and fertilizer. High foreign exchange reserves also allow the Reserve Bank of India to intervene and prevent the rupee from falling too much.“As of May 29, 2026, India’s foreign exchange reserves stood at $682.3 billion, which is Adequate in terms of standard measures of reserve adequacy including import cover (about 11 months) and external debt (89.1%). “Various policy initiatives are expected to strengthen our balance of payments,” Reserve Bank of India Governor Sanjay Malhotra recently said.
But foreign exchange reserves have fallen from all-time highs, and it is the weakness linked to geopolitical uncertainties that is causing concern.
How do the three elements relate to be points of concern:
Dependence on fuel and fertilizers fuels the need for increased foreign exchange outflow as the country pays higher due to rising global prices. This puts pressure on foreign exchange reserves, with the potential for a vicious cycle. DK Srivastava of EY India explains:The rise in fuel prices in light of the depreciation of the rupee puts additional pressure on available foreign exchange reserves. The expectation that these reserves will be depleted further leads to further depreciation of the rupee making the rupee cost of imported fuel higher. As the government attempts to limit pass-through to users and consumers of petroleum products by absorbing some costs, government subsidies are likely to increase. The cost of fertilizers is likely to rise due to supply bottlenecks and higher import prices.
Together, these factors form a vicious cycle starting from higher crude oil prices, higher fertilizer prices, further depreciation of the rupee, higher inflation within the economy and lower growth. Lower growth and higher subsidies lead to higher current account and fiscal imbalances, putting additional pressure on the Indian rupee and depleting foreign exchange reserves. The most immediate risk remains fuel supply bottlenecks and higher than trend prices as their impact ripples throughout the economy affecting input, transportation and storage costs.
Structural risks?
Economists and experts are divided on whether the ongoing situation poses structural problems for the economy.
However, they warn that India remains vulnerable to geopolitical risks due to its high dependence on its energy and fertilizer needs. Vivek Kumar, economist at QuantEco, sees no structural risks yet.“India has rich policy experience in dealing with external crises, and the current experience has galvanized policymakers into action. The government and the RBI have jointly addressed the looming short-term risk, namely pressure on the Bank of Japan, by trying to reduce the current account deficit and also stimulate targeted foreign capital inflows,” he told TOI.“The long-term policy response by the government includes continued focus on trade diversification, rationalization of tariffs and other trade barriers, formulation of new-age free trade agreements, internationalization of the rupee, etc,” he adds.However, DK Srivastava of EY India warns that the global economic and trading system is undergoing major structural change. In recent years, there has been a retreat from the previous focus on multilateral and free trade characterized by low tariffs and limited quantitative restrictions.
There has been a significant change towards restrictions on trade through increased tariffs and quantitative restrictions.“Under these circumstances, India has to brace itself for frequent disruptions in fuel and fertilizer supplies and commodity-related price shocks. India must emphasize building strategic reserves in selected commodities to reduce the negative impact of climate change. These are shocks,” says Srivastava.“It also needs to increase domestic capacity to produce crude oil and fertilisers. A detailed reorientation of India’s growth strategy is needed to safeguard its long-term growth potential,” he adds.Ranen Banerjee of PricewaterhouseCoopers India sees these as structural challenges. “India needs to address this problem through policy measures that include diversifying its energy mix, as well as exploring enhancing fertilizer production from coal gas,” he says.He points out that this will take some time, and in the meantime, the economy will continue to face these risks arising from every geopolitical conflict.The government has reduced taxes on bonds and the Reserve Bank of India has announced several measures to attract foreign capital and deposits of non-resident Indians. Imports of gold and silver were discouraged by increased tariffs. All these steps are aimed at boosting foreign exchange reserves, reducing outflows and protecting the rupee.If they start producing results, India will remain comfortably positioned to cope with rising crude oil and fertilizer bills. However, as economists point out, final steps are needed on the long-term front: building strategic fuel reserves and reducing dependence on fertilizer imports.